More Legal Woes For Elon Musk, This Time to Defend Massive $56 Billion Tesla Compensation Package
When You Are the Largest Shareholder of a Company, Like Tesla’s CEO Elon Musk and the Board of Directors is Made Up of Friends, it Can Be Easy to Give Yourself a Raise, Whether You Deserve it or Not
When the extra payday comes in the form of stock options instead of a paycheck, it’s even easier to push a lavish raise through. However, Musk’s $56 billion Tesla stock option grant is clearly pushing the limits, and he’ll be forced to defend the largest payday in corporate history as he makes his way back into the courtroom.
As someone who pushes the limits in everything he does, Tesla (NASDAQ: TSLA) CEO Elon Musk kept that modus operandi when he put together his $56 billion TSLA stock option grant in 2018. The grant, the largest payday in corporate history, was approved by Tesla’s ownership via a shareholder vote.
However, not all shareholders approved of the compensation package, and now a lawsuit is challenging it. The suit alleges that Twitter’s Board of Directors failed in their fiduciary duty to shareholders by “green-lighting the largest compensation grant in human history.”
The main argument of the lawsuit is that Elon Musk should be considered a “controlling shareholder” on both sides of the transaction. The reasoning is that because Musk owns 22% of the shares and was the awardee of the grant, there was an inherent conflict of interest. The plaintiff argues that a simple shareholder vote does not suffice and that there should have been added due processes, including an independent board committee that would provide its own recommendation.
The plaintiff also argues that the pay package was not an incentive for Musk, as the milestone payments were aligned with existing company business plans. Essentially, Musk copied Tesla’s business plan into his compensation package, then awarded himself billions in stock options each time pre-existing milestones were reached.
The lawsuit also details how beholden the Board of Directors is to Musk. The suit calls out Musk’s recent Twitter acquisition and how Musk commandeered Tesla employees to work on Twitter projects. In most other instances, taking resources away from a public company and sending them to work for an unrelated company would result in the Board of Directors speaking up and preventing the misallocation of resources. Not so at Tesla, where the Board sat idly by while Musk reassigned their employees.
Interestingly, the lawsuit will be heard by the same judge, Kathaleen McCormick, who oversaw Musk’s legal battle with Twitter. The trial will begin on November 14th and could prove to be a landmark case on executive compensation.
